Business Credit Cards can be Rewarding but Risky
By Marcia Frellick
May 4, 2012
Direct mail offers are flowing for business credit cards, many with attractive promotional interest rates and balance transfer deals, says Nick Bourke, director of Pew Charitable Trusts’ Safe Credit Cards Project.
Anyone can get one of these offers, not just business owners. Yet while there are many reasons to open an account, there can be substantial risks involved.
Bourke says business credit cards can be dangerous for people who aren’t aware of two important points: The person with the card will likely be liable for the charges if the business doesn’t pay, and the cards don’t have the same federal protections that consumer credit cards have.
Business credit cards vs. consumer credit cards
Cards are categorized as business credit cards when most or all of the charges are for business purposes. There’s no clear legal line that defines whether a card is a business card or a consumer card.
Yet if a card falls under the category of corporate, small-business or professional use, it falls outside the protections of the Credit CARD Act of 2009 and the Truth in Lending Act. Some banks will voluntarily follow the guidelines, but they don’t have to. Most of the banks Pew has surveyed don’t, Bourke says.
“There are practices that are no longer legal on consumer credit cards that can cost hundreds or even thousands of dollars per year” for a business credit card, Bourke says.
The warnings are in the disclosures, which often include statements such as: “We have the right to change these terms any time for any reason,” and “We reserve the right to impose a penalty rate.”
Business credit card risks
Offenses such as being a day late for payment can cause the business card holder’s interest rate to double or even triple, Bourke says. And those penalty rates can last indefinitely.
“You’d see people go from 12 or 13 percent interest to 27, 30 percent interest,” Bourke says.
Because business credit cards don’t fall under the protections of the CARD Act, issuers can increase a business card’s interest rate and apply it to the money already borrowed. In contrast, regular credit card holders protected by the CARD Act must get 45 days’ notice of an increase, and that increase will apply only to new charges, not the existing balance.
Here are some of the other risks of business cards:
- Double-cycle billing: Molly Brogan, spokeswoman for the advocacy group National Small Business Association, says double-cycle billing is a major complaint among her organization’s members. Issuers can change the date a payment is due on a business credit card from one month to the next. “This can catch small business owners unaware and then it shows up as them having a late payment which then justifies a giant interest rate hike,” she says.
- Reduction of credit limits: In the past two years, about 60 percent of NSBA members have reported they have had their credit limits reduced, Brogan says. Small business owners who have long depended on a $25,000 limit may get cut to $8,000 as issuers try to shore up their risk, according to Brogan. “If one card cuts your limit, often other cards will as well,” Brogan says.
- Trouble with business payments can affect your personal credit report: Late payments or unpaid debts can affect your personal credit report if the account is guaranteed by you.
- No limit on late fees: For consumer credit cards, the limit is $25. There’s no limit on late fees for business credit cards. It’s important to know the late fee before you apply — and remember that it can change.
- Low-interest charges get paid first: Business credit card issuers reserve the right to apply your payment in any way they see fit, Bourke says. This can be an issue for those taking advantage of low promotional interest rates — like a zero percent balance transfer deal. Say you make the minimum payment when the bill is due. The issuer can apply that payment to the low-rate balance transfer, while any new charges accrue at the higher rate and won’t get paid off until the amount of the balance transfer is paid off. “It’s a way to insure that they are maximizing interest charges,” Bourke says. “The CARD Act requires that the issuer applies almost all of your payments to the highest interest rate balance first so it’s a very different situation.”
The push for protection
The debate over protections for business credit cards has been going on for decades and was part of the original discussions during the development of the CARD Act.
“The business card portion was negotiated away in the political process,” Bourke says. Pew and NSBA are among the organizations that want the federal protections extended to business credit cards. Financial industry representatives, meanwhile, argue that small business owners with a presumed higher level of financial sophistication do not need the same protections that consumers do and that extending such protections would further shrink available credit.
Yet NSBA says the protections are urgent for its members, as reliance on credit cards grows while other financial lifelines (like loans) are harder to grab. In NSBA’s 2011 Year-End Economic Report, 33 percent of respondents said they had used credit cards for financing, more than double the 16 percent who did in 1993. NSBA 2011 data also show that 54 percent said their terms had worsened, compared with five years ago. This is the lowest this indicator has been in four years, but still a majority.
Meanwhile, National Federation of Independent Business research published in January 2012 shows that 57 percent of small employers tried to secure credit from a financial institution in the past 12 months, a 9 percent increase from 2010.
In other words, small business owners are eager for credit, which could make them vulnerable to issuers’ terms. Bourke says better disclosure requirements for business credit card issuers may likely come before any extension of the CARD Act.
Business card perks
So why don’t people just use their personal credit cards, with their federal protections, to charge business expenses? Because of the many advantages to having a credit card just for business purposes.
Business credit cards can make it easier to track business expenses. They may also have rewards geared toward your business (such as cash back or airline miles), higher credit limits and more flexible payment options. It also may be good for your business to have the name branded on the card. You can also get separate cards for each employee with individual spending limits.
“What’s important to know is that whatever those advantages may be, they must also be weighed against the disadvantages,” Bourke says.